Why Auditing The Pentagon Isn't Turning Up A Windfall Of Waste

The Pentagon just announced the latest, and disappointing, results of its 28-year auditing effort.Getty

On Thursday the Department of Defense announced the latest results of its ongoing, 28-year auditing effort. Many observers have expected great things from the audit—billions of dollars of waste identified, unneeded programs terminated, and new management directions established. Nothing of the sort happened or, indeed, will happen. That’s not what audits do. Although the audit usefully identified many weaknesses in DOD’s information systems, there is a lively debate about whether auditing DOD is cost-effective. Given the legal requirements and grand expectations in many quarters, DOD has to continue the effort, but at some point, doubts will begin to surface.

What DOD announced. In its press release, DOD announced that five agencies had received clean opinions, and two had received qualified opinions, but the military services had received, in effect, incompletes. A major piece of good news was that the centralized databases could now identify all of the major pieces of equipment that DOD owns. The audits identified weaknesses in information systems, particularly vulnerabilities to cyber-attack. DOD will continue its audit readiness effort, which has already gone on for 28 years. To be fair, DOD is getting closer to full auditability. That’s not an inconsiderable achievement for an organization with $2.7 trillion in assets. This is the largest organization ever audited.

What DOD did not announce. There were no numbers in the announcement for waste identified or for potential savings in the future. There was no forecast about when all accounts would be auditable.

So why is DOD doing this audit?The Chief Financial Officers Act of 1990 requires an audit for all government agencies. This seemed like a reasonable thing for government agencies since it is required of many private institutions. The intention was that it would improve “accountability,” reform DOD management, and thereby reduce waste. More extreme critics argued that “DOD does not know where its money goes” and that the effort would uncover massive abuses.

For purposes of the audit, DOD has been divided into twenty-one separate elements, of which the military services are the largest. The audit will allow DOD to build income statements and balance sheets for each of these elements to the same standards as private organizations.

Is such an expensive audit worthwhile? The annual audit effort costs on the order of $1 billion, about $400 million for the audit itself and the rest to fix the discrepancies identified, so there is a high price for the information being gathered.

Private sector organizations require an audit to assure stockholders and the public that their financial statements accurately reflect the condition of the organization. DOD is in a different situation. Unlike private organizations, its annual budget is described in thousands of pages of documents that are publicly available. Once enacted by Congress, the budget becomes a legally binding document under the Anti-Deficiency Act. Failure to implement the budget precisely results in legal action. Indeed, every year there are a dozen or so investigations about whether some action by an organization was consistent with the congressionally passed budget and, where appropriate, penalties are imposed.

Further, as anyone who has ever supervised a DOD contract knows, DOD contracts are already audited for compliance with legal requirements. Was the money spent for the designated purposes? Was the money spent on allowable items? It is not true, as some have argued, that DOD does not know where the money goes. It is true that the information systems have not been well-designed and that contract audits are slow and manpower intensive.

The audit effort is not without value. Strengthening the information systems, particularly against cyber-attack is certainly worthwhile. Better accounting systems may reduce the cost of auditing contracts. Further, improving information that is available to senior decision-makers may save some staff time. But even here there are major misconceptions. Having readily available information on inventories and the financial status of ongoing programs is not going to affect the rationale for these programs. No official is suddenly going to announce that DOD didn’t need the F-35 after all.

Keep auditing for now. DOD has no option but to continue. The audit is legally required and the public conception of what the audit will show, even if misplaced, makes the audit politically required. At some point, however, the voices of doubt will get louder. Some, dissatisfied that the audit has not uncovered massive abuses, will likely accuse DOD of hiding the savings that they are sure should be there. But these voices will lose credibility over time. Others will gradually become disillusioned. They will question the whole enterprise and propose dialing back the costly effort once agencies achieve, or get close to, a clean opinion.